Merrill Lynch suffered a setback in its legal battle to restrain a team of former advisors who launched their own registered investment advisory firm, Financial Advisor reports.
The advisors, who were with Merrill’s Global Corporate & Institutional Advisory Services team, broke away to form an RIA called OpenArc Corporate Advisors. They were assisted by financial partner Dynasty Financial Partners, and the team’s new custodian Charles Schwab & Co.
All were defendants in Merrill’s complaint, which requested injunctive relief and a temporary restraining order on the RIA’s work with clients. But the request was denied by Judge Victoria Calvert in U.S. District Court in the Northern District of Georgia, and the matter will now go to arbitration with the Financial Industry Regulatory Authority.
In its court filing, Merrill Lynch accused OpenArc, Dynasty, and Schwab of running a “premeditated corporate raid” to lure advisors from the wirehouse to form a $129 billion RIA, contending that “strong-arm tactics” were used. “Upon information and belief, the individual defendants and the corporate defendants have been collaborating to divert the GCIAS business from Merrill and open a Dynasty and Schwab-affiliated registered investment advisor,” the lawsuit said.
The firm sought an injunction barring the defendants from, among other actions, soliciting or contacting Merrill clients or prospects they came to know while at the firm or encouraging Merrill employees to leave. Merrill said it could suffer “irreparable harm” without intervention from the court.
The defendants asked the court to deny Merrill’s motion to enjoin them from contacting their former customers, contending that Merrill’s allegations that their departure violated employee and industry agreements are false and based on “supposition and conjecture.”
“Merrill Lynch is engaging in these improper and deceptive business practices in a desperate attempt to retain customers who desire to maintain a relationship with us,” wrote one of the team’s leaders, Erik M. Bjerke, in an affidavit. They also denied that their actions constituted a corporate raid under the Protocol for Broker Recruiting. Merrill Lynch had alleged that OpenArc was not a signatory member of the protocol.
The defendants also denied carrying out a “corporate raid”, saying, “Merrill cannot show raiding occurred as it was one team that left to form its own business. Generally, raiding is understood as a claim against a recruiting firm.”
The judge has now stayed the case pending FINRA arbitration, which could take a year to 18 months.
“Yesterday’s court decision is a watershed moment for the wealth management industry,” said Dynasty CEO Shirl Penney. “It acknowledges the strength and sophistication of the independent movement. The judge found no evidence to show that the protocol for broker recruitment was not followed. The Court also noted that OpenArc, Dynasty and Schwab acted in good faith,” Penney said. Dynasty said that 120 Merrill staff members, including 70 financial advisors, had moved to OpenArc.
“The injunction hearing is only the first step in the litigation process,” a Merrill Lynch statement said. “We look forward to vigorously pursuing this matter in arbitration and are confident that a Finra panel will agree that the defendants engaged in a corporate raid and conspired to poach our employees and clients.”
If you are looking to move from one firm to another, planning to go open up or join an RIA, looking to sell your firm or grow through acquisition or bringing on new advisors, the attorneys at Hyman Cotter PC have the experience to guide you through the process to protect your interests. Regardless of whether the transition involves protocol or non-protocol firms, we will properly advise you so that you can focus on your transition and we will work to limit the risks you face during this transitional period. For more information, contact Hyman Cotter PC at 312-291-4600 or through our online contact form for a free consultation.
